The People of America's Oil and Natural Gas Indusry

The Wrong Response: Tax Hikes

Mark Green

Mark Green
Posted April 29, 2011

You'd think that with the polls showing the administration is taking the blame for higher gasoline prices, the White House economic team would come up with something better to say to the American people than let's raise energy taxes by eliminating business deductions that historically have helped encourage domestic production. The president laid down his marker this week in a letter to congressional leaders, calling for the elimination of tax breaks he says are worth $4 billion a year. The New York Times reports the administration is targeting a deduction for intangible drilling costs and the oil and gas depletion allowance. Don't be surprised if it looks at other provisions as well.

How does the public feel about this? Let's have a listen:

Over the next few days we'll look at some of the tax provisions the White House wants to eliminate. As mentioned above, one is the expensing of intangible drilling costs (IDC), which has been around since 1913 and is similar to R&D deductions available to other industries. Administration budget scorers claim ending the deduction would effectively raise more than $12 billion in tax revenue over 10 years.

Under current law producers can deduct annual drilling costs that can't be recovered - costs incurred even if nothing results but a dry hole: site preparation, labor, engineering and design. That's 60 to 80 percent of the cost of a well. Independent producers can deduct 100 percent of their IDCs in the current year, while integrated oil companies may expense 70 percent and amortize the other 30 percent over five years.

It's also important to note that this deduction applies to both oil and natural gas wells - for example, the natural gas wells being drilled in the Marcellus, Fayetteville and Barnett shales, bringing thousands of jobs and economic activity to those areas.

Would eliminating this business deduction help the government find more revenue? A Wood Mackenzie study found that repealing the deduction would discourage domestic investment, likely resulting in less revenue to the government and a greater dependence on foreign oil. Ironic, right? Higher taxes but less revenue - and we could end up importing more oil.

The larger point is the oil and natural gas industry is being singled out in the White House's attempt to fig leaf itself amid rising gasoline prices - which its policies have done nothing to address. If the IDC and other provisions are repealed, regular Americans will be the real losers.

For information on the tax ramifications in the administration's budget proposals, click here. For more detail on the intangible drilling cost deduction click here. For background on why oil and natural gas treatments aren't subsidies, click here.

ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.